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USD, Rates and Russell 2000

Client Talking Points


It didn’t take much of a Dollar Up move (+1.2% on the week) to get everything inversely correlated to it to fall last week. Commodities and Oil were down -2.4% and -4.1%, respectively, last week (USD is back to flat on a year-over-year basis so whoever is looking for a “big USD tailwind to earnings” should remember that).


Treasury Yields stopped going down last week as Fed Heads jawboned about a rate hike (Dollar Up); immediate-term risk range on the UST 10YR is 1.84-1.98%; that’s a tight range – let’s see if they’re serious this time or just S&P 500 dependent (tightening into this Profit #Recession would be deflationary, again).


The Russell 2000 lagged (again) last week, dropping -2.0% on the week (vs. -0.7% for the S&P 500); at -16.7% from its all-time high in July. The RUT is back to within 330 basis points of being in crash mode (> 20% decline from the July peak); Russell 2000 peaked when U.S. corporate profits peaked (Q2 of 2015).


*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

CME Group (CME) put up a decent fourth quarter earnings print with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts.


Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.


We continue to like General Mills (GIS) as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without its noise surrounding the numbers; Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising just to name a few, muddied the waters. But digging through the noise, this is a business that is truly turning a corner. When they set sail on fiscal year 2016 back in June of 2015, we knew this was not going to be an easy ship to turn towards success. Now, with many key product platforms turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success by realization of sustained top line growth in the low single digit range.


In our model the second quarter is the toughest compare on both GDP and U.S. corporate profits so we want to be very careful going into that and be positioned defensively. Stay long Long-Term Treasuries (TLT).


While small/mid cap U.S. Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

Three for the Road


NEW | Howe:‘Foreboding’ Election Implications https://app.hedgeye.com/insights/49938-howe-a-foreboding-election-and-its-implications… @HoweGeneration @KeithMcCullough @HedgeyeDDale @Hedgeye


No profit grows where no pleasure is taken.

William Shakespeare


The total number of female billionaires fell to 190 from 197 last year, women make up 10% of the world’s 1,810 ten-figure fortunes.

CHART OF THE DAY: Corporate Profits' Worst Decline Since 2008 Financial Crisis

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... If only the bulls of the 2015 peak warned you that Q415 corporate profits would slow another -540 basis points sequentially (vs. Q3 when they first went negative) to -10.5% year-over-year.


As Darius Dale wrote to our Institutional clients on Friday, you have to go all the way back to the depths of the 2008 Financial Crisis (Q4 08) to find a worse year-over-year decline in US Corporate Profits."


CHART OF THE DAY: Corporate Profits' Worst Decline Since 2008 Financial Crisis - 3 28 Profits Down  Stocks Down Slide 39

The Taming of Profits

“No profit grows where no pleasure is taken.”

-William Shakespeare


And, generally speaking, no multiple expansion grows when there’s no corporate profit growth. Rather than The Taming of the Shrew (i.e. where that Shakespeare quote comes from), USA is seeing The Taming of Profits.


No, I’m not talking about the taming of US stock market profits and/or returns (i.e. the ones that were negative in 2015 and mostly negative for 2016 YTD) – I’m simply talking about US Corporate Profits, which were reported to have remained in #Recession on Friday.


No worries. We’ll probably be the only ones on Wall St. writing about it this morning. If only the bulls of the 2015 peak warned you that Q415 corporate profits would slow another -540 basis points sequentially (vs. Q3 when they first went negative) to -10.5% year-over-year.


The Taming of Profits - recession cartoon 02.22.2016


Back to the Global Macro Grind


As Darius Dale wrote to our Institutional clients on Friday, you have to go all the way back to the depths of the 2008 Financial Crisis (Q408) to find a worse year-over-year decline in US Corporate Profits.


“More importantly, Q4 marked the 2nd consecutive quarter of declining corporate profit growth… such occurrences have been proceeded by stock market crashes in the subsequent year for at least the past 30 years (5 occurrences).”


Since Q4 ended on December 31st (they haven’t been able to centrally plan a change in the calendar dates yet), has anyone considered why we just saw the worst 6 week start to a stock market year ever? Yep, it’s the Profit vs. Credit Cycle (within the Economic Cycle), stupid.


Ok. If you’re not stupid, but really super smart and still blaming “the algos and risk parity funds” for the AUG-SEP and DEC-FEB US stock market declines, but giving them 0% credit for the JUL, OCT, and MAR decelerating volume bounces… all good, Old Wall broheem, all good.


Many who missed the economic cycle slowing from its peak (and the commensurate profit #slowing and credit cycles that always come along with such a rate of change move) will blame the US Dollar for that.


They, of course, wouldn’t have blamed Ben Bernanke devaluing the US Dollar to a 40 year low for the all-time high in SP500 Earnings (2015) though. That would be as ridiculous as blaming the machines and corporate buy-backs for market up days.


Last week the US Dollar came back, and the “reflation” trade didn’t like that. With the US Dollar Index +1.2% on the week:


  1. The Euro (vs. USD) fell -0.9% on the week to +2.8% YTD
  2. The Yen (vs. USD) fell -1.4% on the week to +6.3% YTD
  3. The Canadian Dollar (vs. USD) fell -2.0% on the week to +4.3% YTD
  4. Commodities (CRB Index) fell -2.4% on the week to -2.3% YTD
  5. Oil (WTI) fell -4.1% on the week to -1.3% YTD
  6. Gold fell -2.5% on the week to +15.3% YTD


Yeah, I know. Those 5 things are just the things that have immediate-term inverse correlations of 79-99% vs. the US Dollar, but there’s this other big thing called the SP500 that now has an immediate-term (3-week) inverse correlation of -0.80 vs. USD too.


Imagine that. Imagine the machines stopped chasing the hope that the Fed fades on their rate hike plan, the US dollar gets devalued (again), and all of America keeps arguing about the “inequality” gap having nothing to do with Fed Dollar Policy?


You see, when you devalue the purchasing power of a human being:


A) Almost everything they need to buy to survive goes up in price as the value of their currency falls

B) A small % of human beings (i.e. us) get paid if they own the asset prices we are “reflating”


And if you’re not a human being (i.e. you’re a US corporation) and your profits are falling, all you have to do is lever the company up with “cheap” US debt, buy back the stock with other people’s money, lower the share count, and pay yourself on non-GAAP earnings per share.




While small/mid cap US Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:


  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 companies)


At the same time, Consensus Macro positioning remained what most US stock market bulls would have to admit they want/need from here (Down Dollar => Up Gold, Commodities, and Oil):


  1. Net LONG position in USD (CFTC futures/options contracts) was -2.16x standard deviations vs. its TTM average
  2. Net LONG positions in Gold and Oil held 1yr z-scores of +2.45x and +1.33x, respectively


In other words, in the face of both the economy and profits slowing, Wall St. wants to go back to that ole story of Burning The Buck, I guess. It’s sad and it probably won’t work… but, as Shakespeare went on to say about profits and pleasures, “study what you most affect.”


Our immediate-term Global Macro Risk Ranges are now:


RUT 1060-1107
USD 94.68-97.01
Oil (WTI) 36.06-42.91

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Taming of Profits - 3 28 Profits Down  Stocks Down Slide 39

the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Retail Idea List: Major Growth Spurt This Week

Takeaway: We’re shaking up the Retail Idea list by adding 12 names to our vetting bench. Shorts outnumber longs 2-to-1.

Lots of changes (12 to be exact) to our Idea List this morning.

First off, we broke both longs and shorts into three categories 1) Best Ideas, 2) Other Active Longs, and 3) Bench. All three labels speak for themselves. Best Ideas are our highest conviction names, Active Ideas includes names where we’re officially on the clock – but lack the conviction at this point to make the ‘Big’ call, and the Bench indicates that either Research is still in progress, or the price is not yet appropriate.


A second observation…we’re looking at 3 Longs and 8 Shorts, with roughly 10 names on the Vetting Bench. Definitely lopsided, but the latest rally took away the ‘cheap’ factor for a lot of these names.


Here’s a 1-liner on all additions this week.


COH: Near the higher range of where we’re comfortable, but the space continues to look good to us. COH likely to test higher than people think.

TLRD: When a name loses 75% of its value after botching up a deal, we’ve got to at least scrub it for some value – maybe.

FLEX: Flextronics. Not a retail name – but we don’t care. It’s got razor thin (3%) margins, and signed a major deal with Nike. We know that Nike is thinking VERY big on this one. We need to quantify the difference it could make. At FLEX’s margin structure, it could be material.

TJX: We’re more convinced that there will be excess inventory in the department store channel this year, which helps TJX. Also, Home Goods might only be 11% of the company, but it’s bigger than RH and Wayfair. Can’t overlook that. Yes, the chart and valuation are both scary. But you could have said that a year ago. And a year before that, and so on.

FRAN: We’re not sure if we ‘get’ the concept, but we also did not ‘get it’ when the stock was 2x where it is today. Not a lot of unit growth out there in retail today, and this name’s got it. This is worth a look (at a minimum to see if it should or should not be growing – either way, there’s a call).



HBI: We don’t like the Brands, the Company, positioning in the Category, the Management team, or the Stock. This is kind of like LULU (as it relates to those characteristics) but with less desirable product.



PVH: The company is being celebrated for putting up horrible quality numbers.  We think it’s seriously growth-constrained. Looks like a short is two quarters early given expectations – but we’ll be patient.

SHOO: Over exposed to two segments we don’t like – Department Stores and non-athletic/fashion footwear. Core business rolling over, growth from acquisitions drying up, new peakish margins, at a 17.7x earnings and 10.6x EBITDA screens like a short to us.

OLLI: A rare square footage growth story, but currently overpriced with underappreciated capital needs and long term risks to the model. When the company anniversaries its private equity IPO in July, we could start to see some fireworks. If so, we’ll have a front row seat.

DKS: No Sports Authority won’t be a big help to DKS, and not making up any of the margin dollars lost in Golf/Hunt. In fact, let’s look at the reason WHY TSA went under in the first place. Those factors are bearish for DKS. We’d previously been bullish on DKS – but that ship has sailed.

WSM: Just listen to that last conference call. This management team is perfectly appropriate for a $1bn company. Unfortunately, WSM is $5bn.

FINL: The same factors that will hurt FL (NKE aggressively shifting around traditional wholesalers) could destroy FINL, which trips over its own kicks when everything else is going just great in the land of shoe retail.


Retail Idea List: Major Growth Spurt This Week - 3 28 2016 Chart1

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Washington on Wall Street: A ‘Foreboding’ Election And Its Implications (3/24/2016)



Hedgeye's Demography Sector Head Neil Howe discusses the GOP and Democratic presidential candidates, how Donald Trump could “destroy the traditional Republican party,” and what it means for markets.



2. McCullough: Give Me Liberty! (3/23/2016)



In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes a page out of American patriot Patrick Henry’s playbook on the anniversary of his "Give me liberty, or give me death!" speech. He also addresses critics of his current bearish stance on equities.


3. McCullough: Joke of the Year? Fed Data Dependence (3/22/2016)



In this animated excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough pulls no punches on San Francisco Fed President John Williams’ head-scratching contention that he’s data dependent. If you like this excerpt, you’ll love The Macro Show.

The Week Ahead

The Economic Data calendar for the week of the 28th of March through the 1st of April is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 03.25.16 Week Ahead